Cost, Insurance and Freight (CIF) contract is a method through which an importer (buyer) and an exporter (seller) bound themselves with the responsibilities of transferring goods. The CIF contract is mostly used while the goods are to be transferred by ships or any vessels.
The name CIF comprises of three words – cost, insurance, and freight. Thus, it expresses the meaning as a contract for the expenses paid by a seller to cover the costs, insurance, and freight of a buyer's order while it is in transit. Under a CIF contract, the seller bears the costs before the freight loads and the buyer pays the money later.
For example, X enters into a CIF contract with A for selling 100 pipes, the costs shall be divided by the freight. If the scenario requires that the said contract is incorporated with the Uniform Customs and Practice for Documentary Credits (UCP) 600 and the payment to be made by irrevocable documentary letter of credit, then the clauses of UCP 600 related to the irrevocable documentary letter of credit may be analysed.
According to Article 1 of UCP, when the letter of credit indicates that such a letter is subject to the UCP rules then such provisions deem applicable to that letter. Hence, the CIF contract between X and A shall be governed by the rules mentioned.
A letter of credit ensures the payment to the seller from the buyer in the case of any transactions that need to be made upon certain issues. There are two types of credits such as commercial and standby where commercial credits adopt the primary payment mechanism and the standby follows the secondary mechanism.
In the given situation, the commercial letter of credit used whereupon the application of buyer, the issuing bank authorises another bank known as the advising or confirming bank to make payment to the beneficiary means the seller. The seller is the provider of goods and the issuing bank acts as the payer on behalf of its customer, meaning the applicant.
A credit is irrevocable under the UCP 600. In practice, the seller presents the required documents to the confirming bank for the payment, the bank examines the documents and if satisfied forward the documents to the issuing bank for debiting the payment. The issuing bank again examines the documents and initiates the debit for the payment.
Moreover, the bank is under obligation to pay and accept the relevant documents not obliged under any claims or defences arising out of the contract and the credit operations are concerned with the documents, not with the goods, services, or performances to which the documents may relate.
However, the fraud exceptions can overturn such rules of UCP 600. Therefore, it can be argued that the buyers are under risks concerning the quality, quantity of the goods and forgery may be a concern as a company may suffer a huge loss due to the forgery of another company. The Bank cannot be held liable for the payment even if any forgery takes place or they will not take any liability for the quantity, quality of the goods.
Hence, if the documents seem valid then the bank is bound to pay whereas the buyer finds defected goods then it becomes hard for the buyer to prevent the seller from drawing the letter of credit as UCP 600 provides no rules for any injunction of the process. Despite the fact, Article 27 of UCP 600 may help the buyer as it requires a clean transport document bearing no clause or notation declaring a defective condition of the goods or their packaging.
If the goods are in a defected condition then such documents may not be produced except forgery and if the buyer does not conform to the sale agreement then this may act as a bar for drawing the letter of credit as the bank requires valid documents. Besides, Articles 35-37 of CISG held the seller liable if the goods do not conform to the contract and the buyer retains the right to claim damages, not the injunctions.
However, in the case of Alternative Power Solutions versus Central Electricity Board, the Privy Council has confirmed that an injunction for restraining a bank from paying only be justified in extraordinary circumstances based on fraud because restraining a bank from paying may cause greater damage to the issuing bank's obligations than the reason why the party wants the injunction.
Moreover, in Taurus Petroleum versus SOMO, the Supreme Court argued in favour of the injunction restraining an issuing bank's payment to the letter of credit. Similarly, in Alessandra Yarns LLC v Tongxiang Baoding Textile Co, four criteria have to be met for granting an injunction where prima facie doubtful case, strong prima facie evidence of fraud, urgency, and irreparable harm is essential.
Therefore, it can be argued that in general practice the UCP 600 does not allow an injunction however seeking an injunction can be successful if extraordinary circumstances can be proved.
The writer is an intern at MC Law Services